DBRS Confirms Ratings on Genworth Canada Affiliates

DBRS has today confirmed the Financial Strength rating of Genworth Financial Mortgage Insurance Company Canada (Genworth Canada or the Company) at AA with a Stable trend. The AA (low) Issuer Rating and the corresponding AA (low) rating on the Senior Unsubordinated Debt of Genworth MI Canada Inc. (Genworth MI or the Parent), the ultimate holding company of Genworth Canada, are similarly being confirmed.

The DBRS methodology for rating mortgage insurance (MI) companies places a great deal of emphasis on the insurer’s capital adequacy under a worst-case runoff scenario, which is consistent with that used by DBRS in assigning ratings to Canadian residential mortgage-backed securities (RMBS) transactions. Under the MI methodology, DBRS finds that, given the size and parameters of the Company’s MI liabilities, the Company presently has capital that is consistent with at least the assigned AA Financial Strength rating. The inherently stable profitability of the Company is expected to generate sufficient capital to fund expected organic growth at the current rating while maintaining regulatory capital, even as the Company budgets to pay out between 30% and 40% of its earnings to its Parent.

Loss ratios remain steady as the Company continues to actively work with delinquent accounts in order to mitigate losses. Loss ratios of approximately 35% are consistent with the Company’s pricing assumptions which assume a 35% to 40% loss ratio. Falling expense ratios over the past five years reflect the benefits of economies of scale and continued spending on technology to enhance productivity and efficiency. Combined ratios have hovered around 50% for the past 18 months. This strong underwriting result combined with investment income earned on the Company’s $4.2 billion investment portfolio yields a solid return on equity (ROE) of approximately 13%.

The Company has a proven track record of conservative underwriting and effective risk management, which has allowed it to report very modest loss ratios, despite the low point experienced in the housing cycle during 2009. Moreover, DBRS believes that Canada has avoided the adverse consequences of the extreme housing market deterioration that continues to be experienced by U.S. MI companies. Specifically, the Canadian residential mortgage market is fundamentally conservative, with more borrower recourse, fewer tax incentives to remain fully leveraged against property values and lower penetration of the more aggressive mortgage products that have hurt the U.S. MI and housing industries. Canada also has a more rational banking industry, a more prudent RMBS market and strict oversight by the Office of the Superintendent of Financial Institutions (OSFI) of both lenders and MI providers. To reinforce this conservatism, the federal Minister of Finance continues to modify the criteria for MI products as a way to contain Canadian consumer credit expansion, albeit at the cost of slowing the Company’s organic growth potential.

The Issuer Rating on the Parent follows from the application of the DBRS holding company methodology. The structural subordination of the Parent’s financial obligations relative to those of the regulated operating subsidiary suggests that a one-notch rating differential is appropriate for a company of this strong credit quality and with only a modest level of holding company debt at 14% of capitalization. As a 100% owner of the Company, the Parent has access to all of the Company’s free cash flow, subject to regulatory capital requirements, which are currently not restrictive. The current estimated level of dividends received from the Company provides excellent coverage of the Parent’s debt service obligations, which are complemented by the Parent’s intention to hold unencumbered cash at the holding company level.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Canadian Mortgage Insurance Companies and Rating Parent/Holding Companies and Their Subsidiaries, which can be found on our website under Methodologies.